India Stands in the Way of China’s Free Trade Ambitions

India’s refusal to open its markets is dashing China’s hopes to dominate trade in Asia.

A China-backed trade deal meant to cement the Beijing’s dominance in Asia has veered off course because India is hesitant to open its borders to cheap Chinese goods.

Without the participation of India, the third-largest Asian economy, the free-trade zone China hoped to create might still happen, but it won’t carry the same economic heft, depriving Beijing of the chance to set the trade rules for the region.

The missed opportunity puts China on much the same footing as the United States, as Chinese President Xi Jinping and U.S. President Donald Trump continue their first face-to-face meeting Friday at Trump’s Palm Beach, Fla. club, where the trade tensions between their two countries will be a major point of discussion. Trump withdrew from the sprawling Trans Pacific Partnership with 11 other countries as one of his first acts in office, squandering a chance for the United States to steer trade in Asia. Now China looks like it may lose its chance as well, over Indian Prime Minister Narendra Modi’s refusal to open its borders.

“India is reasons one, two and three why the deal might not get done,” said Douglas Paal, vice president for studies at the Carnegie Endowment for International Peace and a former adviser to Taiwan on trade. “There’s a strongly-held belief that this will bring in unwanted competition.”

The China-backed Regional Comprehensive Economic Partnership is currently being negotiated between the 10 members of the Association of Southeast Asian Nations (ASEAN), plus six other Asian nations — Australia, China, India, Japan, South Korea and New Zealand. If approved, it would cover 46 percent of the world’s population and 24 percent of global GDP. It would also leave the United States on the sidelines, as Washington is not a signatory on the deal.

India, though it is participating in the trade talks, is balking at opening its market to Chinese products. Like the United States, India’s trade deficit with China is big: $52 billion. Modi doesn’t want lower cost imports to compete with ones made in India even if it means opening foreign markets to Indian companies.

“The Modi government — one of the most pro-business in India’s history — is not necessarily pro-trade,” Rick Rossow, the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies, said. “He’s still very uncomfortable with really deep trade integration.“

The Indian prime minister has made growing his country’s manufacturing sector a priority. In September 2014, he launched the “Make in India” initiative in an effort to expand manufacturing after growth there fell to its lowest level in a decade. The goal is to make the sector more efficient and attractive for foreign investment.

And it appears to be working. GE, Siemens, HTC, Toshiba, and Boeing have either established or are in process of setting up manufacturing operations in India, according to the Indian Brand Equity Foundation. Modi’s hope is to grow manufacturing to represent 25 percent of Indian GDP by 2025. Right now, it accounts for 16 percent.

Still, the RCEP is likely to be agreed to in some forms, multiple trade experts said. ASEAN, which is celebrating its 50th anniversary this year, has pledged to finalize the deal before the end of the year to mark the occasion. The next round of negotiations are set to take place in the Philippines in May.

“RCEP is a diplomatic exercise,” said Derek Scissors, a resident scholar at the American Enterprise Institute who studies the Indian and Chinese economies. “It’’s gotten more attention since TPP died, but diplomatically it’s important” to agree to something by the end of the year.

Any deal will be a watered-down version of the original plan to create a free-trade zone, which is something India would never agree to, Ross said. The current deal also lacks the protections for labor, human rights and the environment that were contained in the TPP.

“It’s a low grade deal as it is,” said Andrew Small, a China expert at the German Marshall Fund. “Whatever results form this is not going to be a free trade agreement that we would have seen with TPP. For India to agree, there would have to be even a lower bar than there is right now.”

Edmund Sim, a trade lawyer who has worked throughout Asia, said it’s misleading to compare the two deals because the regulatory, environmental, and worker standards were so much tougher in the TPP.

“RCEP had lower ambitions. Completing it will be less of a milestone that TPP would have been,” Sim, who is a partner at the Washington law firm Appleton Luff, said.

Photo credit: LINTAO ZHANG/Getty Images

David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis